Civil Tax Fraud vs. Criminal Tax Evasion – What’s the Difference?
- 1 Tax Fraud vs Tax Evasion
- 2 Civil Tax Fraud vs. Criminal Tax Evasion
- 3 Civil Tax Fraud
- 4 Criminal Tax Fraud
- 5 IRS Tax Evasion Penalties Can Be Very Serious
- 6 Example: Negligence vs. Intentional Tax Fraud
- 7 Never Filed a Return – Non-Willful/Negligence
- 8 Criminal Violations for Evasion, Fraud or Unfiled Returns
- 9 IRS Special Agents – Criminal Investigation
- 10 Relevant Criminal Tax Code Sections
- 11 7203. Willful failure to File Return, Supply Information, or Pay Tax
- 12 Willfully failing to file an FBAR or False FBAR — 31 U.S.C. § 5322
- 13 Golding & Golding, A PLC
Civil Tax Fraud vs. Criminal Tax Evasion – What’s the Difference?
In recent years, the IRS had been cracking down on Tax Fraud (Civil or Criminal) and Tax Evasion (Criminal).
While the IRS handles the civil aspects of Fraud (and quasi-criminal investigations) through the criminal investigation unit (aka IRS Special Agents) — criminal violations are enforced through the DOJ and other agencies.
Tax Fraud vs Tax Evasion
The IRS has bee Civil Tax Fraud can be Civil or Criminal. Typically, it will depend on your facts and circumstances. When it is criminal, it is usually referred to as “Tax Evasion.”
Common Tax Fraud/Evasion issues include:
- Unreported Income
- Underreporting Income
- Fraudulent Deductions
- Unreported foreign Accounts
- Unreported foreign Income
- Unreported foreign Assets
- Unreported foreign Investments
Civil Tax Fraud vs. Criminal Tax Evasion
Depending on the facts and circumstances of your situation, there may be several different penalties the IRS can issue against you, for either filing a fraudulent or false tax return, or not filing a tax return at all.
One of the worst types of non-criminal penalties the IRS can issue is the civil tax fraud penalties.
The reason why is twofold:
First, there’s the stigma associated with being found to be fraudulent by the IRS, which can lead to further audits down the line.
Second, the penalties that the IRS can issue against an individual when the IRS can prove by clear and convincing evidence that a person committed tax fraud are severe.
Civil Tax Fraud
The penalties for civil tax fraud under the Internal Revenue Code can reach 75% penalty on the taxes due. Of course, the IRS can also try to issue additional penalties depending on whether you haven’t filed a tax return (failure-to-file), haven’t paid your taxes (failure-to-pay) and/or have undisclosed or unreported foreign accounts, assets, investments and/or income.
Section 6663 provides in part:
If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.
As provided by the IRS:
Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud. Such evidence must show the taxpayer’s intent to evade the assessment of tax, which the taxpayer believed to be owing.
Intent is distinguished from inadvertence, reliance on incorrect technical advice, sincerely-held difference of opinion, negligence or carelessness. In the case of a joint return, intent must be established separately for each spouse as required by IRC 6663(c) .
The fraud of one spouse cannot be used to impute fraud by the other spouse. Thus, the civil fraud penalty may be asserted only on one spouse, unless there is sufficient evidence that both spouses participated in the fraudulent act(s) resulting in the underpayment reported in their joint return.
Criminal Tax Fraud
If the IRS believes you acted criminally, they may refer you to the IRS Special Agents from the Criminal Investigation Department, in order to launch a criminal investigation against you for tax evasion.
This department will investigate you to determine whether they believe you acted with criminal intent, and determine whether you should be referred for further investigation and/or prosecution
IRS Tax Evasion Penalties Can Be Very Serious
Unfortunately, Tax Evasion Penalties are some of the most serious penalties that the IRS can issue. While Civil tax Fraud penalties alone can reach upwards of 75% of the underpayment in tax, criminal tax evasion penalties may result in millions of dollars of the fines and penalties (when all the penalties are calculated) and along with a potential criminal investigation, indictment and prosecution.
Example: Negligence vs. Intentional Tax Fraud
If you never filed a tax return, or stopped filing returns in any year in which you had received income, you may be setting yourself up for disaster down the line.
The following is a basic example of the difference civil and criminal tax fraud:
Never Filed a Return – Non-Willful/Negligence
If you are a W-2 employee and taxes are being withheld (or estimated taxes were paid), then at least you have that fact in your favor. Likewise, if you didn’t file a tax return because you did not have any income that was generated, you may also be able to avoid more significant fines and penalties, since the main failure-to-file and failure-to-pay penalties are based upon the value of the un-paid tax, and if you have no unpaid tax, there would be no failure-to-file/failure-to-pay penalty.
Criminal Violations for Evasion, Fraud or Unfiled Returns
If you did not file a tax return because you knew you had a substantial amount of income and not want to report it…that begins your trek into criminal violations.
Increased Chance of Audit
Typically, what will happen is if you are found to either have filed a return that is fraudulent and/or not filed a tax return, and the IRS determines there is substantial income that should have been reported, there is a higher likelihood that you will be audited.
Reverse Eggshell Audit
This is considered a reverse eggshell audit, because the IRS has information that could incriminate you, and typically they will not share that information with you. Rather, they sit back and let you incriminate yourself.
The IRS agent Knows or is Pretty Sure you committed a Tax Crime. With that said, the IRS Agent dances around the issues in order to collect as much financial and other background as he or she can, couching it in the fact that it is required to support a civil audit case against you — when in all reality, the Agent/Examiner is mounting a criminal case against you.
This is nearly always illegal. Why? Because if you are ever in a Civil Audit and Auditor/Examiner suspects Tax Fraud or another Tax Crime, he or she must immediately cease the audit. You have the absolute right against self-incrimination and it is illegal to couch a criminal investigation in a civil audit.
The Problem: It may be hard to prove it was Criminal Investigation couched as a Civil Audit.
IRS Special Agents – Criminal Investigation
Following a Reverse Eggshell Audit, you are more likely to be referred to the IRS Special Agents for a criminal investigation.
Please note, the IRS does not tell you that they have referred your case to the Special Agents. Rather, you typically meet and grett the Special Agents assigned to your case when you least expect it.
The IRS Special Agents travel in pairs, and show up to your house, work, club, event unannounced hoping to interview you without counsel
Do not speak with them, and kindly tell them that you have an attorney, or that you will be obtaining an attorney and that the attorney will contact the agents.
Relevant Criminal Tax Code Sections
26 USC 7201 – Tax Evasion
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.
7206. Fraud and false statements
Any person who—
(1) Declaration under penalties of perjury
Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or
(2) Aid or assistance
Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; or
(3) Fraudulent bonds, permits, and entries
Simulates or falsely or fraudulently executes or signs any bond, permit, entry, or other document required by the provisions of the internal revenue laws, or by any regulation made in pursuance thereof, or procures the same to be falsely or fraudulently executed, or advises, aids in, or connives at such execution thereof; or
(4) Removal or concealment with intent to defraud
Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by section 6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title; or
(5) Compromises and closing agreements
In connection with any compromise under section 7122, or offer of such compromise, or in connection with any closing agreement under section 7121, or offer to enter into any such agreement, willfully—
(A) Concealment of property
Conceals from any officer or employee of the United States any property belonging to the estate of a taxpayer or other person liable in respect of the tax, or
(B) Withholding, falsifying, and destroying records
Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, relating to the estate or financial condition of the taxpayer or other person liable in respect of the tax shall be guilty of a felony
7203. Willful failure to File Return, Supply Information, or Pay Tax
Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than 25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution. In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure.
**In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting “felony” for “misdemeanor” and “5 years” for “1 year”.
Willfully failing to file an FBAR or False FBAR — 31 U.S.C. § 5322
(a) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315 or 5324 of this title or a regulation prescribed under section 5315 or 5324), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, shall be fined not more than $250,000, or imprisoned for not more than five years, or both.
(b) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315 or 5324 of this title or a regulation prescribed under section 5315 or 5324), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, while violating another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, shall be fined not more than $500,000, imprisoned for not more than 10 years, or both.
(c) For a violation of section 5318(a)(2) of this title or a regulation prescribed under section 5318(a)(2), a separate violation occurs for each day the violation continues and at each office, branch, or place of business at which a violation occurs or continues. (d) A financial institution or agency that violates any provision of subsection (i) or (j) of section 5318, or any special measures imposed under section 5318A, or any regulation prescribed under subsection (i) or (j) of section 5318 or section 5318A, shall be fined in an amount equal to not less than 2 times the amount of the transaction, but not more than $1,000,000.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
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